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Another Real Estate Bubble? Redfin Explains Why Not

The Motley Fool is out in Seattle, and today we stopped by Redfin to learn more about its unique position in the real estate industry. Vice President of Analytics and New Business Adam Wiener met with us to discuss how Redfin leverages technology to bring more value to the real estate transaction.

In the following video interview with the Fool's Austin Smith, Wiener shares Redfin's take on why rising home prices don't indicate another real estate bubble. The tech/real estate company tracks the market closely, including factors such as pricing, inventory levels, price-to-income ratios, and cash sales.

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Austin Smith: I'm wondering, what sort of broad homeownership trends are you guys seeing right now? Obviously a very unusual market over the last few years. What's the 30,000-foot view look like? Who's buying homes? Where are they buying them? If you have any information on that.

Adam Wiener: Yeah, absolutely. It's something that we track very closely, obviously. We need to know what's going on in the market.

I would say there's been a broad-based recovery. We track, of the markets that Redfin is in, which is about 22 major metros around the U.S., and in basically every single one of those markets prices are up, year over year.

Buyers are coming back to the market, where I think a lot of people were really nervous to buy last year or the year before. Buyer confidence has definitely returned. I think that's certainly fueled by how low interest rates are right now, that affordability for homes is quite good, currently.

The challenge that we're facing is that there is not enough inventory in the market right now. We're still not yet at bubble-level pricing, so for the folks who bought in 2005, 2006, 2007, it's still difficult for them to sell their home, and even folks who could afford to, I think a lot of the sellers are holding out for better prices, so we have this inventory crunch.

What that means is that, for buyers, it can be a little bit frustrating right now. Sometimes it's taking two, three, four, five offers to find a home that they like, that they can afford, and where their offer actually gets accepted.

I think that's one of the big challenges that buyers are facing right now.

Smith: Anecdotally, I think we've seen that on our end as well. There are some people around the office who recently bought homes, and their homes were on the market for four days and there's already competing bids and it's going above price.

Given that kind of dynamic, does that result in some sort of artificial bubble, or how does that play out?

Wiener: Our take, at Redfin, is that we're not really in a bubble right now. When you compare to the way that things were during the bubble years, there are a couple of key differences that you have to keep in mind.

It's true that prices have risen rapidly and, like I said, there are more buyers than sellers in the market right now, so it is a seller's market, but that doesn't necessarily mean it's a bubble. The things that we look at are price-to-income ratios.

If you look at where we are now compared to, say, the pre-bubble back in the year 2000, of the markets that we track we're right around the same ratio of home price to income. Home prices aren't rising faster than incomes, with a few exceptions.

In D.C., in Los Angeles, and San Francisco, prices are rising faster than income. Now, particularly in the Bay Area, there's so much capital influx there from the technology world that actual income ... sometimes is a little hard to gauge house prices relative to that.

But I would say, for the most part, that's a big indicator for us. With interest rates being as low as they are, actually payment to house price is probably right around where it was in 2000, or potentially even lower in many markets. That's one.

Two, credit standards really have gotten a lot tighter, so you're not seeing those crazy no-doc loans that once upon a time anyone was able to get money to buy a home. That's really preventing, I think, prices from running away.

Then the last thing we look at is the percentage of sales that are made for cash. Right now, almost half the sales in the market are for cash.

Smith: Wow.

Wiener: That's up from, I think, around 20% of sales that were for cash during the bubble years. As a result, I think it's pretty clear that people are putting hard assets behind the housing market. We feel that the prices where they are right now are pretty well supported.

Smith: Does that indicate a much more investing buyer, as opposed to pre-bubble, if you're paying all cash? I'm just curious what that would indicate.

Wiener: It depends on where you are in the market. Certainly at the lower price points in the market, you do see a lot of investor activity, where people are buying multiple properties and they're looking to hold them and rent them out for income.

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